RJF

Raymond James Financial, Inc. - 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2007, and the six months ended March 31, 2007. Raymond James Financial, Inc. (RJF) is a holding company headquartered in Florida with subsidiaries engaged in financial services, including retail brokerage (Private Client Group), institutional sales and trading (Capital Markets), asset management, and banking (RJBank). The company operates as a large accelerated filer.

Key Financial Metrics

Revenue and Profit (Three Months Ended March 31, 2007):

• Total Revenues: $738.3 million (up 12% from $660.0 million in the prior year).
• Net Revenues: $625.7 million (up 5% from $596.0 million).
• Net Income: $59.7 million (down 3% from $61.5 million).
• Diluted Earnings Per Share (EPS): $0.50 (down 6% from $0.53).
• Pre-tax Income: $93.0 million (down 2% from $95.3 million).

Revenue and Profit (Six Months Ended March 31, 2007):

• Total Revenues: $1.45 billion (up 17% from $1.24 billion).
• Net Income: $119.1 million (up 12% from $106.6 million).
• Diluted EPS: $1.00 (up 7% from $0.93).

Balance Sheet and Liquidity (as of March 31, 2007):

• Total Assets: $14.17 billion (up 23% from $11.52 billion at Sept 30, 2006).
• Cash and Cash Equivalents: $660.5 million.
• Assets Segregated Pursuant to Federal Regulations: $3.73 billion.
• Bank Loans (Net): $3.01 billion (up from $2.26 billion).
• Bank Deposits: $4.69 billion (up from $2.81 billion).
• Loans Payable: $488.1 million (up from $141.6 million).
• Shareholders' Equity: $1.60 billion.

Cash Flow (Six Months Ended March 31, 2007):

• Operating Activities: Net cash used of $140.4 million.
• Investing Activities: Net cash used of $2.07 billion (primarily loan originations and securities purchases).
• Financing Activities: Net cash provided of $2.22 billion (driven by increased bank deposits and borrowings).

Material Changes vs. Prior Period

Revenue Growth Drivers: The increase in total revenues was driven by the Private Client Group (up 14%), Asset Management (up 26%), and RJBank (up 149%). RJBank's dramatic growth is attributed to a new "sweep" program transferring client cash balances from brokerage accounts to the bank, increasing deposits by $1.89 billion in the six-month period.

Profit Decline Factors: Despite revenue growth, quarterly net income declined slightly. This was influenced by a decrease in Capital Markets pre-tax income (down 51%) due to lower trading profits and syndicate volume. Additionally, the prior year quarter included $16 million in non-recurring gains from the sale of NYSE and Montreal Stock Exchange seats, whereas the current quarter included only $4.5 million in gains from the sale of an India joint venture and a Delta aircraft lease interest.

Expense Trends: Non-interest expenses increased to $530.8 million (up 5% year-over-year), primarily due to higher compensation, commissions, and benefits ($428.9 million) reflecting revenue growth and recruiting efforts.

Outlook, Risks, and Contingencies

Management Commentary: Management notes that results are highly correlated to U.S. equity market activity. Positive factors include improved Financial Advisor metrics, an improving investment banking pipeline, and increased assets under management. The company plans to continue expanding the RJBank sweep offering, which may require an additional $150 million to $200 million in capital over the next several years.

Risks and Contingencies:

• Continental Airlines Lease: RJF holds a leveraged lease with Continental Airlines valued at approximately $10.6 million. While current on payments, a default could result in a write-down of the investment and accelerated tax payments.
• Turkish Tax Assessment: The Turkish affiliate (RJY) is contesting a $6.8 million tax assessment for the year 2001. The company has made provisions for potential exposure.
• Legal Proceedings: The company faces various lawsuits and arbitrations typical of the retail securities industry. Management believes the ultimate resolution will not have a material adverse impact, though individual cases could affect future periods.
• Market Risk: The company manages interest rate and equity price risk through hedging and position limits. Value-at-Risk (VaR) for the institutional fixed income portfolio averaged $443,000 daily over the six-month period.

Key Facts for Investor Verification

• Non-Recurring Items: Verify the impact of the $16 million gain in the prior year (stock exchange seats) versus the $4.5 million gain in the current year (India joint venture/Delta lease) when comparing year-over-year earnings.
• RJBank Growth: Confirm the sustainability of the 149% revenue increase at RJBank, which is heavily reliant on the internal sweep of client cash balances rather than organic deposit growth.
• Capital Requirements: Monitor the company's capital infusion plans ($150M-$200M) required to support the continued expansion of the RJBank sweep program.
• Continental Airlines Exposure: Track the credit status of Continental Airlines regarding the $10.6 million leveraged lease investment.
• Stock Repurchases: Note that the company has $66.8 million remaining under a $75 million authorization for share repurchases, though no formal plan is currently active.